Don't make a monolith out of total addressable market

Almost a decade ago, a mentor of mine told me he learned from legendary investor Michael Moritz that the best predictor of success for an emerging business in Sequoia’s portfolio was the company’s total addressable market.

We had this discussion right after I’d left the structured credit world to become an accidental tech entrepreneur. Ever since, I've seen fellow entrepreneurs, investors, and occasionally myself obsess over TAM as the single most important indicator of potential growth. 

This is a huge problem.  

From a B2B perspective, it’s not an appropriate measuring stick for the vast majority of early-stage businesses that have yet to hit the $50 million threshold in annual recurring revenue. To an extent, focusing on broad TAM has even been dismissed by leaders like Peter Thiel and many others in the venture/growth community, leading to an evolution of thinking to prioritize “wedges” of TAM. These are essentially submarkets that when controlled give companies a dominant position in a niche that becomes economically meaningful, enabling them to expand into adjacencies and grow to large scale.   

Mechanistically, this makes sense and is now considered common knowledge. The important thing, however, for founders and operators, is less about accepting this as a valid strategy and more about understanding why it actually matters. And why this matters is pretty simple—your customers or clients get no value or benefit from being part of a cohort that you are targeting. They get value and benefit from teams that are passionate about building products that enrich businesses and lives. And even better—many more positive aspects of rational company-building emanate from focusing on problem-solving as opposed to “market seeking.” 

The area where I see mistakes made most frequently—and where I have made my costliest mistakes in the past decade—is a lack of focus on who the customer is and what the market is. My belief is that this is less about companies not understanding where the value of their offering lies and more about obsessing too much about reaching as many verticals as possible to create early revenue-growth trajectories that validate the supposedly large TAM.    

This is a common problem in preseed, seed, and even Series A companies searching for product-market fit, especially in B2B. It’s even an issue for later-stage businesses that are under the illusion that they have product-market fit.  

So, the big question here is: Are most growth-oriented businesses receiving valuable feedback and getting efficient product development and go-to-market strategy evolution out of approaching a wider swath of the market in search of the elusive “product-market fit”?  And what is the result of this TAM scramble?   

I would contend that this wide-swath approach is problematic for most companies that decide to pursue it. And in terms of the results of the TAM scramble, they are:  

 

  1. An inability to get clarity on product design  
  2. Muddled go-to-market strategies and confusion on “who your customer is”   
  3. Bad pricing and monetization strategies as a result of the first two issues  
  4. Inefficient staffing  
  5. Companies that are, as Paul Graham would put it, “Default Dead” instead of “Default Alive” with very little hope of survival outside of strategic exits  

So, if you’re a leader of an early-stage business and you’re trying to position yourself for rapid growth, don’t make the mistake that I and so many others have made. Don’t make a monolith out of total addressable market. If you do, you’ll likely miss what makes your company great in the first place. 

Topic(s): software development